By Dickens Kamugisha
Daily Monitor last Wednesday (14 December 2016) carried an interesting article titled, Russia sets new terms for investing in Hoima oil refinery. Interesting because over five months after the Russian consortium RT Global Resources walked away from protracted negotiations to construct Uganda’s proposed refinery, the country’s new envoy gave a glimpse into why this happened.
In the article, H.E Mr. Alexander Dmitrievich Polyakov pointed out that in Russian investors’ views, Uganda needs a smaller refinery than the proposed 60,000 barrels per day (bpd) one. He said 7,000 to 8,000 barrels per day would make better economic sense considering that Uganda might not be able to produce enough oil for even a 30,000 bpd refinery in the short term. Thereafter, the refinery could be enlarged.
Certainly, the envoy’s suggestions have to be interrogated in order to ensure that Uganda’s, and not Russia’s, interests are taken care of.
It’s worth noting that Mr Polyakov’s assertions were similar to concerns raised by a consultant hired by Africa Institute for Energy Governance (AFIEGO) on whether it made economic and not political sense for Uganda to build a big refinery, if any at all.
In 2008/2009, a hot debate raged on whether Uganda should construct a 5,000 bpd refinery or that of higher capacity. Government, under the Early Production Scheme (EPS), wanted to build a mini-refinery with a capacity of 5,000 bpd.
To enable an informed debate, AFIEGO hired Professor Keith Mayers, a refinery expert from Richmond Energy Ltd, UK who told stakeholder meetings that a refinery of less than 60,000 bpd would not be economically viable for Uganda.
He informed Ugandans that it would not be good to build a refinery to produce more than what it can domestically consume. His reason was that a refinery in Uganda will not be efficient enough to produce cheap oil products to make profits. Despite being against a small refinery, he said that perhaps for national security purposes and to meet Uganda’s petroleum needs, a smaller refinery could be built.
“Just produce little that you can consume but don’t expect to produce for the foreign markets where more efficient refineries produce a variety of products at relatively cheaper prices,” he said at one of the meetings with stakeholders.
At the end of the meetings, government harassed the expert, saying he was trying to sabotage government programmes. The professor cut short his stay in the country to save himself.
The above happened in 2009 and a few months later, government abandoned the idea to construct a 5,000 bpd refinery. However, come 2016 and the Russian envoy is discouraging
Uganda from building a bigger refinery and is instead advising the country to focus on a small one of between 7,000 and 8,000 barrels per day.
What does this say about our oil sector? First, several voices – including expert ones – have cautioned against the idea of a refinery in Uganda because it does not make economic sense. In addition to the Russian envoy and the above refinery expert, companies such as Total and Tullow have said that a refinery is not the best oil development option for Uganda. A top level official with Kenya’s refinery also once told a meeting that if she could offer Uganda advice, it would be not to construct a refinery as no single refinery in Africa is operating at a profit.
In the face of the above, what should Uganda do? We should learn from our neighbours and heed the advice given by experts. Government needs to be open; it needs to tell Ugandans why in the face of a number of opposing expert opinions, it is still insistent on constructing a refinery. Government’s argument has been that Uganda’s refinery will supply countries in the region. However, with cheaper refinery products coming from large scale producers with more advanced technology, will this happen?
Following my extensive research and experience, it’s my view that our planned investments in a refinery should be put on hold until impeccable evidence from government convinces us that a refinery is socially and economically viable for Uganda. Without such evidence, we should say no to such projects, at least for now.
Indeed, between November 2 and 10, 2016, I was in Nigeria on an oil experience sharing trip and I witnessed a situation where the 450,000 bpd Nigerian refineries have, for decades, failed to produce competitive oil products for Nigerians. On top of the refineries, Nigeria still exports over 2 million barrels of oil per day. They use part of the money from the crude exports to subsidise the domestically-produced oil for the sake of keeping the domestic refineries in operation. This explains why on November 5, 2016, the Nigerian government was pleading with the World Bank for a credit of $30 billion to solve her current financial crisis.
All these are lessons and experiences that new producers like Uganda can learn from to make prudent decisions for the good of all Ugandans, and to avoid the oil curse that continues to characterise oil-rich African countries.
We need to learn from our neighbours on the continent. Government should provide citizens with information so that Ugandans can best decide what size of the refinery, if any at all, is best. We should not sacrifice economics at the altar of politics.
Mr Kamugisha writer is the CEO of Africa Institute for Energy Governance (AFIEGO).
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